At around 31,000 words, the current Fair Labor Standards Act
(FLSA)--the complex rules that define when employers are required
to pay white-collar workers overtime--isn't exactly the most
hands-on government document available. The Department of
Labor's recent proposal to update overtime laws might help
eliminate some of the red tape for businesses by simplifying a
section of the FLSA--but at what cost?

The current rules state that workers who make less than $8,000 a
year are guaranteed overtime, says Tammy McCutchen, administrator
of the Labor Department's wage and hour division. The proposed
rules--which could take effect as early as late 2003--promise
overtime to more white-collar salaried employees by raising the
minimum salary level required for the overtime exemption from
$8,000 to $22,100 year. This is the largest increase since the FLSA
was enacted in 1938. "What that means is that everyone who
makes less than $22,100 a year is automatically entitled to
overtime," says McCutchen.

The changes would not affect employees who do manual labor, such
as mechanics, plumbers or electricians, and are already guaranteed
overtime. Only employees who work in an office environment and do
non-manual work would qualify, says McCutchen.

The simplified rules, which come in response to rising
litigation between employers and workers, should ensure that
employers understand what their legal obligations are, says
McCutchen. This should make the rules easier to comply with and
easier for the Department of Labor to enforce.

However, the annual payroll costs--estimated at $335 million to
$896 million--could be hard for some businesses to swallow. The
changes would mean higher payroll costs for businesses, especially
for those who have several employees who work long hours but still
make salaries less than the $22,100, like assistant managers of
stores and restaurants. "Basically these employers will either
start to pay those employees overtime," says McCutchen,
"or they will have to raise their salaries over the $22,000
level."

Add to that the additional one-time cost--estimated at $535
million to $680 million--for businesses to implement the new rules
in employee compensation programs, and the bill really starts to
soar. The total costs of this regulation to businesses? Somewhere
between $870 million and $1.58 billion, says McCutchen.

But it's not only salary levels that employers have to worry
about in order to comply with overtime laws--employers can also be
required to pay overtime to employees based on the duties their
employees perform. Under the current regulations, there are complex
rules for employers to follow in order to classify white-collar
employees as exempt under the "duties test" (regulations
specifying when workers are exempt from overtime based on what
percentage of their time is spent performing certain
nonprofessional tasks, such as typing, photocopying or even using
the fax machine too much).

The proposed changes provide a simpler alternative, known as the
primary duties test: "If non-exempt work becomes your
[employee's] main duty, then you could lose your exemption and
owe [back] overtime for two years," says McCutchen. Citing one
case where a company settled for $30 million for assistant
managers, McCutchen says: "The allegation was that the
assistant managers were spending too much time actually serving
customers. [The company] lost a lot of money because they had to
pay all their assistant managers back pay [for two
years]."

The changes should clarify these complex rules, says McCutchen,
making sure there are fewer traps for unwary businesses to fall
into. Businesses are expected to save an estimated $1.1 billion to
$1.9 billion annually by avoiding unexpected legal costs and
including liability that can occur when employers lose their
overtime exemption.

Robert Wenbourne, special counsel in the Sacramento office of
national law firm Foley & Lardner, agrees: "The litigation [in
overtime cases] is fierce. Anything that helps employers attempt to
comply with the law is beneficial."

Next Step

Get more information on the
proposed changes, including a comparison of current rules with the
proposed changes, on the Department of Labor's Wage and Hour
Division Web site. You can also see a full summary of the
changes here.

The proposed rules are open to a 90-day public comment period,
ending June 30, 2003. After reviewing the comments, the Wage and
Hour Division will make changes deemed necessary; if approved, the
proposal will take effect late this year or in early 2004. Comments
may be submitted to: Tammy D. McCutchen, Administrator, Wage and
Hour Division, Employment Standards Administration, U.S. Department
of Labor, Room S-3502, 200 Constitution Ave. N.W., Washington, DC
20210. You can also fax your comments (20 pages or less) to (202)
693-1432 or e-mail whd-reg@fenix2.dol-esa.gov.